You don't need cost accounting to understand where you are making money
Theory and practice
You need to start by asking yourself: “But what am I really making money on?” Many think that without an advanced cost accounting system it is impossible to answer, but that is not the case.
There is a simple, powerful and often underestimated indicator: COGS (Cost of Goods Sold). In other words: the cost of the raw materials, packaging or goods sold, adjusted for changes in inventory.
Let's start with a number.
If your COGS is 40% of turnover, you have a company average: but that average hides highly profitable products and products that destroy margin. And this is where the real difference comes in. Every company has its own bills of materials, its own “recipes”.
If you analyse COGS by product, you immediately find out:
- if you are below 40% → high value-added product;
- if you are above 40% → low-margin product.
And that in itself is a revolution.
Because, without implementing a full cost accounting system, you can build a real “CT scan” of your business, a clear picture of where you are creating value.
And at that point you can act to:
- push sales of the most profitable products;
- review the prices or costs of the underperforming ones;
- outsource whatever is not worth producing in-house.
But it doesn't end there.
By analysing COGS by product sold, you can also work out profitability by customer. And that opens up a whole new world, because not all customers are equal: some bring turnover while others bring margin. And the two do not always coincide.
This type of analysis also helps improve commercial and production choices, because it shows which items deserve greater investment and which, on the other hand, absorb resources without generating an adequate return. Many companies discover too late that some best-selling products produce minimal margins, while others in less demand deliver much higher profitability. Having this data makes it possible to build more informed strategies, improve the sales mix and better guide decisions on pricing and the management of production resources.
More structured companies can go further, integrating this data with the Budget and Rolling Forecast and progressively improving the accuracy of their forecasts.
But the key point remains the same: you do not need to wait for the perfect system to start controlling; you need to start reading the numbers in the right way.
Understanding which products absorb resources without generating profitability makes it possible to act quickly, before imbalances become structural. And it is often precisely this awareness that turns a company with “a big turnover” into a business that produces real margins.
So the real question is: are you looking at turnover… or are you understanding where the margin comes from?